The interest rate you pay is one of the most important considerations to make when applying for a loan. For investors, it should by no means be the be all and end all. However, saving dollars where you can will help you get you where you want to quicker!
In our opinion, one of the best ways to ensure your with the suitable lenders for your goals AND have the best pricing possible, is to understand exactly how banks price your loans.
Most of the country’s major lending institutions work of a ‘standard variable rate’ model, with a discount of this rate provided to most borrowers. The standard variable rate for lenders is usually well above the actual interest rate borrowers pay. Every borrower will have a different discount, meaning the rate they pay is different. Usually when making changes to interest rates, lenders will adjust the standard variable rate for their loans. This will then flow through to all their variable mortgage loans.
For example, as at Feb 2018, the current standard variable rate for P&I Home loans for the major banks are below. This does not mean that CBA and ANZ are necessarily cheaper than NAB & Westpac.
Currently, a 1.45% discount is common, which means that a borrower will be paying 3.77% with CBA.
Lenders provide a different discount to each borrower. Given Westpac and NAB currently have higher SVR’s, its not unusual to have a higher discount from them being applied, meaning a similar actual rate for borrowers.
The size of the discount is usually tied to the LVR, loan size, existing relationship, postcode of the property & total lending exposure. Lenders have this pricing model as it means that every borrower can have a different price for the same loan. Essentially this model means more profit for banks!
How to get bigger discounts on your mortgage and lower interest rates?
You may wonder how come your loan is at a lower/higher rate than your friends, particularly when they’re on a lower rate!
The truth is, the biggest factor to the rate you have is the time you applied for the loan and the market pricing at the time. If you apply when banks are aggressive and hungry for business, then you’re likely to be on a bigger discount. If you apply when lenders are trying to slow a certain type of business, the discount you receive may be smaller.
For example, the 12-month change in discounting from one of the major banks for investment loans has gone from 1.5% discounts for all investment loans, now to 0.65% discounts for the same smaller loans. This means that a borrower could have an 0.85% difference in their interest rate, simply based on when they asked for it!
Discounts on home loans usually increase over time. That is, the discounts that are available today, are usually better than the ones that were being applied 5 years ago. This means it makes sense for borrowers to stay on top of their interest rates and regularly review their rates.
It’s also a good idea to stay on top of market conditions and learn how your lenders price their existing loans. For example, some lenders provide smaller discounts to their existing customers, while others will provide them with the same discounts are their new customers. If you know your bank is aggressively discounting, it may be a good idea to ask them to review your rate.
It’s all about the time you ask!
In some cases, it may make sense to refinance purely for a lower rate. In these situations, we’d advise to consider the longer term needs of your loan, as variable rates move frequently, so what may be cheaper today may not necessarily be cheaper tomorrow!